Note from AGM on September 25, 2018 based on discussion with Mr. Lokesh Harjani, Whole time Director, in reply to queries of various shareholders. There is also possibility of some misunderstanding at my end while writing notes. Future investors are expected to do their own due diligence.

Industry

TPP: Major US brands like Hanes, Jockey has set up in Vietnam. Don’t think TPP is fully cancelled and US might leverage to get better deals. Cancellation of TPP has not affected us in any way. All the major brands are still investing in Vietnam and there is no slowdown in that at all. Infact from our numbers, we have been asked for larger quantities from major players. Jockey has come into the picture. Infact due to this ongoing trade war, major clients have said Indonesia, Vietnam, Thailand is of prime importance for them.

Vietnam will play an important role in this region. Indonesia Philippines Thailand are also important. 3-4 brands have reached out to us saying they are afraid of this US-China trade war and hence this region becomes very important.
Manufacturing in the US is not viable as US yarn prices have gone very high. Some of the production from China has shifted to India and we are expecting more orders but right now it is a very small and wont affect numbers at all.

Market sizing

Hanes : US$100m

Jockey: US$150mn

Fruit of the Loom: US$150m+

India market size is around 1500-1800 crs including medicals and other segments

US retail market: Our segment maximum sales comes from online sales. All the major brands like Hanes have majority of their sales coming from online. Infact for Amazon, this segment is amongst the top consumer products sold online.

Asian competition: SPICA is a major competitor. They supply to all the players globally. Page/Lux (though we also supply to them) have their own production facility. Small players from Thailand. Customers prefer old suppliers than switching suppliers.

Company Specific

RM Price escalation: Disparity was very high in last 3-5months and hence we approached major clients for renegotiation. We are very much hedged now and even on certain stock that we have in inventory and would realise same price (higher) even though inventory is of lower cost.

Recent crude price increase: Recent crude price increase is not factored in. There is no specific formula. Most of our contracts are perpetual in nature. We reach customers only if there is more than 2% movement in RM prices. As a supplier we also don’t want to reach out to customers for small change and at the same time, even Americans don’t like much up and down relationships.

Margins: We would not be going back to very healthy margins as seen couple of years back. However, we would see big change than what we saw last year. Products have been upgraded. We change the product line every 4-5years with approval from major customers. Most of these new products have much higher price points and have high margins. Bulk of our orders are higher margins products now. We have realised the invested cost in these products. Product approvals generally is 2 months and it goes products by products.

India Brands: Amul has Zoiro and others have also launched high premium products. We are supplying to some of them. Volumes are going up slightly. However, mass market products can’t afford our products as we charge 22/mtr vs. 6-7 they are currently paying. We have started with Pepe as well

Hanes: 75% of the revenue from Vietnam comes from Hanes. India is not doing too much for them. Majority of underwear in the world is manufactured in China. Total elastic sourcing by Hanes is US$100m and we are supplying around US$8, so there is scope of more sales.

Jockey USA: We are working on a programme they have started alongwith a partner here in Chennai set up by them. US Team was here and said we want to working with Premco. This is Jockey USA and not Page Industries

Product Differentiation: Every client of ours have said our Quality is much much better. For eg: We were able to charge a little more because if a box of 1000mts of elastic we only had 3 joints while other smaller players have 15-20joints in 1000mts. That’s why we are able to charge higher. In a product when a person sees the joint, he has to take off the entire elastic and put a new one. This consumes lot of production time and hence we are among the preferred suppliers.

Women’s wear: We do work with Rupa for Softline but we are not able to do Women’s wear in a big way as it requires lot of dyeing capabilities and we don’t have that. Our plants in Vapi actually comes in an area with lot of dyeing restrictions. We are looking for such facilities but nothing concrete as yet. Hence we are somehow restricted and not able to capture this market.

Inhouse production vs Outsourcing: Don’t think companies would go for Inhouse production as elastic cost is under 1% of total revenue. Its always better to outsource in that case.

Vision: We have plans in our minds and we talked about backward integration as well like Yarn. We think if Brands want a particular color of yarn we can supply to them as we already have relation with our customers. We are not going backward yet but certainly under consideration

Guidance: We think we would be able to do FY16 numbers this year as we want to give Vietnam facility little more time.

Utilisation of funds / Capex: Depends on the project size. No body in India is focusing on womens segment and a it is a big opportunity but dyeing capacity is a major constraint.

Vietnam Facility Expansion: I am quite interested in opening up a facility in Phase 2 but want to settle down 1st phase. We wont have too much room compared to what they are asking for. We want to be prepared for next leg of growth. We are quite interested in women’s segment. 58% of total requirement is for women’s segment. Capex wont be small if we decide to go for expansion.

If they can get 8% to 10% market share they can get a business of around 344 to 430 Crs.
Their Peak sales is around 74Crs (Fy16).
So they have the market opportunity to increase 5 to 6 times of their peak sales of 74Crs.

So as of now they have 8% of Hanes market share and rest (78-56=22) is 0.6% (22/3600) market share. High dependence on 1 client.
Also since Vietnam 75% revenue is for Hanes and not much for Hanes from India means Vietnam itself is > 70Cr. What is happening in India?

Some fo the assumptions that needs to be corrected. Market opportunity includes both men and women’s wear. Premco does not cater to Women’s wear as they don’t have dying capabilities. So market size for Premco is less than the number you have calculated.

India is currently operating at 50-55%. So in my view increase in utilization of Vietnam is because some of the work is transferred from India.

I may not be able to answer all the questions as I don’t track the company. Just went to the AGM to get a feel.

Getting into yarn would be a red flag for me as it is a highly capital intensive business with very low return on capital. Also if there is something that can be outsourced then why to waste resource in a low RoCE business.

I would rather prefer them to foray into womens wear with some capex (dyeing capabilities) and increase focus there. Having said that the real question for me is: Vietnam facility was set up as Hanes asked them to do so. Despite such confidence from Hanes, they only give 8% of their total requirement to Premco. This puzzles me as i assume Premco is a trusted partner for them.

I will add few points
They are not going in manufacturing of yarn. They will just dye it . They also says yarn manufacturing capex is high.
Their vietnam plant is running at 90 %. Every quarter they are adding 10 % more so in year they will have 40 % more capacity.
Also about hanes insisting for full capacity to be used for them. But they are not commitng and using indian capacity for them.
Their dependence on hanes is not to worry at all. Hanes started own company in India for innerwear 20 yrs back. But they failed that time . At that time premco was supplying them elastic. And hanes kept business relation since then. So they have good relation. But last 2 -3 years indian market has changed. So all indian companies improving their range of products. People have started to spend more on innerwear. So premco.wants to use indian operation to cater them.
P.s i am holding shares so my view may be biased

Sorry little correction here. Their main competitor is SPICA and not spyker.
But great input and efforts. As I.am very bad in writing…
Spica have 4 plants in Vietnam for hanes and other. So understand that how much scope is more for premco if they expand.

They will definitely go for yarn dyeing. As it’s must for going in ladies inner wear market. Also value addition is more .Already they have provision at vietnam plant . And doing it on very small scale.
Their capacity can never be 100 utilised. It’s not like other plant. Here one design they start producing it runs for month. And if they change to other order . Their machines are stopped and prepared for next designs. It takes few days so production is lost. So if no change in products order they run it at max.

RM Price escalation: Disparity was very high in last 3-5months and hence we approached major clients for renegotiation. We are very much hedged now and even on certain stock that we have in inventory and would realise same price (higher) even though inventory is of lower cost.

Recent crude price increase: Recent crude price increase is not factored in. There is no specific formula. Most of our contracts are perpetual in nature. We reach customers only if there is more than 2% movement in RM prices. As a supplier we also don’t want to reach out to customers for small change and at the same time, even Americans don’t like much up and down relationships.

Very weak results. It looks as if what management mentioned in AGM does not match with what is documented in the results. All the blame is on crude price.

The spike In crude prices, affected the pricing of products as well demand. However, Company looks forward to softening of international crude prices In ensunig quarter antbetter demand.

Inventory is as good as one quarter sales. They don’t do retail sales. They make to supply to big firms like Hanes. I don’t think managmt is that novice to manufacture 28 cr product without any commitment and that also is as good as sale of one quarter.
So what they had said in AGM I mentioned above may be the reason

TPP termination has no adverse effect on premco. Yes continuation could had more positive for them. They supply to hanes from vietnam plant. And I don’t think hanes has any slowdown.
Crude effect i don’t know…